Small-business microlending on the rise

5 min readJun. 5, 2009

Advertiser Disclosure

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

How We Make Money.

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for .

Editorial Integrity

Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.

How We Make Money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

Microlending is on the rise as more people start up their own businesses and banks cut back on their lending.

Microlenders are generally nonprofit-based community organizations offering loans between $500 and $35,000. Interest rates on the loans range from 9 percent to 14 percent, and their duration can span anywhere from six months to six years, with most of them closer to the short end of that range.

7 steps to take first

There are some steps you can take before asking for a loan. The microlenders you choose in the final step may be able to assist you with getting the information you need.

Put together a business plan that includes an analysis of your market and its competitors.

Update your resume and obtain the resumes of other senior managers.

Pull your business and personal tax returns for the last three years.

Provide revenue, cash flow and profit expectations for the next three years with thorough explanation.

If you have an existing business, assemble your financial statements for the last three years.

Prepare as detailed an explanation as possible for why you need the loan and how it will help your business prosper.

Tremendous demand

There are no official statistics for microlending, but a study from the Opportunity Finance Network, which surveyed 118 of the nation’s 260 microlenders, showed that 63 percent reported an increase in applications for microloans during the fourth quarter, and 48 percent actually originated more loans.

The sagging economy explains much of the growth in microlending. Bleak job prospects have inspired many people to start their own businesses or expand ones they may have begun in their spare time.

And with banks trimming their lending activity across the board, both long-standing small businesses and new enterprises are finding it difficult to borrow from traditional banks.

“We’re absolutely seeing growth,” says Wendy Baumann, president of the Wisconsin Women’s Business Initiative Corp., a Milwaukee microlender, which serves men as well.

“There’s growth in loan referrals from banks (as they cut back lending) and people off the street,” she says. “People are getting laid off or worried about it and looking at entrepreneurial opportunities — part-time consulting or maybe even full-time self-employment.”

Some entrepreneurs who have been in business for years are seeing relationships with their banks deteriorate. “And now they are looking at microlenders to fill some of that void,” says Mark Quinn, executive director of the Greater Newark Business Development Consortium, a New Jersey microlender.

Baumann reports a 15 percent increase in request for loans at her organization from a year ago. Quinn sees an even steeper rise of more than 50 percent. “There’s a tremendous demand for capital,” he says.

Ron Hutcheson, CEO of Smart Funding Solutions in Kennesaw, Ga., has benefited from a microloan he obtained earlier this year from the Atlanta Micro Fund. Hutcheson’s company is a broker for businesses that seek to exchange their credit card receivables for cash from merchant cash advance providers.

He wanted to implement an Internet marketing campaign to attract more vendors to his business. A marketer offered Hutcheson a campaign at a discount — provided he paid for it upfront.

So he sought some cash to finance the campaign. Hutcheson says a bank loan wasn’t an option for him because without tangible assets to offer as collateral, banks have no interest in lending to him. The loan from Atlanta Micro Fund worked out perfectly, he says.

Faster processing

“It was fast, it was very convenient, and it was cost-effective,” he says. Hutcheson declined to specify the amount of the loan but said it carried a 12-percent interest rate.

A process that took two weeks with the microlender would have taken about three months with a bank, he says. “And now with the credit crisis, it’s even more difficult.”

The return has far exceeded his interest payment, Hutcheson says. Smart Funding Solutions has picked up 25 new vendors from the campaign. “We might go back to them when we think about another marketing campaign,” he says.

Microlenders report an increase in applications from small-business owners with high credit scores because banks have stopped lending, says Gina Harman, president of New York-based microlender ACCION USA.

“Credit scores for our applicants last year averaged 580,” says Marvin Bryant, CEO of Atlanta Micro Fund. “Now it’s about 615, and we expect it go up more toward the end of the year.”

At the other end of the spectrum, Harman says an increasing number of applicants also are suffering from credit woes. “We’re seeing people maxed out on their credit cards and additional debt.”

More than 50 percent of entrepreneurs who complete applications for loans from the Greater Newark Business Development are loan-worthy, Quinn says. But it’s only able to lend to about half of them.

This year it will lend more than $1 million, up from about $400,000 last year. “We’ll try to meet as much demand as we can without becoming overextended because the technical assistance that we give is also an important component.”

Importance of training

“Studies show that giving money only takes them (new businesses) so far,” says Keith Weigelt, a strategy professor at the University of Pennsylvania’s Wharton School. “It’s important when people start a business that they have education.”

At ACCION, “we work with some clients who might not have a cash-flow statement or tax forms,” Harman says. “We offer business plan writing programs and marketing training.”

With demand for microloans exceeding supply, this year’s fiscal stimulus package earmarked an additional $30 million for the Small Business Administration’s microloan program, which previously totaled $20 million.

The SBA will announce plans for creating more microloans during the summer, says agency spokesman Mike Stamler. The SBA program has produced loan volume of 2,100 to 2,300 in each of the past three years. Loans through the SBA program average about $13,000.

Lower default rate

Microloans started overseas as development tools in impoverished nations. Loans generally totaled $50 to $100, Weigelt says. But here, of course, the figures are larger.

As for untrained entrepreneurs seeking loans, some critics say the money would be better off spent on preparing them to work for large corporations.

“There is some validity to that argument,” Weigelt says. But he says that the default rate for microloans is much lower than for traditional commercial bank loans.

Experts say that with the economy slow to recover and banks slow to resume lending, demand will keep growing for microloans. “I think this is very much the theme for 2009 and probably into 2010 as well,” Baumann says. “The upside is that the banks might wake up to very good and competitive sources of alternative finance.”

To be sure, the trend could ultimately reverse. “Once the credit markets are unfrozen and banks do more lending, then we’ll probably see a drop-off in applicants,” Bryant says. “At that point outreach will become more important for us.”